Bank Runs – A Major Banking Crisis
A Bank Run literally means that customers or depositors of a bank run to the bank in a large number and demand to withdraw the money that they have kept in the bank. When a large crowd of people choose to withdraw their money from the bank, it causes a threat to the bank to lose a large percentage of its customers and liquidity in a short period of time. This panic is generally caused because the public looses faith in the bank or financial institution and there is speculation about the bank becoming insolvent.
If the bank becomes insolvent, then the depositors fear that they may lose the money they have deposited and kept for safe keeping in the banks. These bank runs fuel the banks problems and in a way due to the bank runs these banks may become insolvent or bankrupt. This is because under the fractional reserve banking system banks only keep a fraction of the deposits liquid so if all the customers want to withdraw deposits, it’s a major problem. So it is a dangerous phenomenon for banks. Bank runs generally take place when there is serious financial crisis, economic recession or a likelihood of reorganizing the bank policy to avoid default.
Major Bank Runs
• In the Great Depression of early 1930s, a major economic crisis was caused due to bank runs.
• During the 2008 Financial Crisis in the United States there were many bank runs to major banks, banking and security firms and financial institutions. People removed billions of dollars in withdrawals in a few months time.
• In the recent past, there was a rumor about banks in Sweden that caused a panic and a bank run before the officials clarified that the rumor was untrue and tried to calm the public. Also due to the banking crisis in Cyprus recently, many Cypriots decided to participate in a bank run because the new banking policy proposed a tax on deposits and Cypriots feared losing their money to this tax.
How to Avoid Bank Runs
When a bank is vulnerable to a default or bankruptcy, a bailout package from financial agencies or the government may help. If a run has started, the bank can halt temporarily the withdrawals. This will stop the damage till panic is calmed down. Also strict regulation of the banking system will prevent the banks from being weak and vulnerable, giving confidence to the customers. Bank Runs can hurt the economy of the banks and the country.